Mining and commodities investment ideas for exposure to the super cycle

by Jonathan Adams
mining and commodities stocks

With gains of 21% since the beginning of the year, commodities has been the best performing mainstream asset class in financial markets over the first seven months of 2021. And many experts, including Doug King, founder and CEO of the American hedge fund King’s Merchant Commodity Fund, believe the commodities bull run is not a temporary bounce back from the coronavirus crisis. He, and others, are convinced it has a long way for the commodities bull run to go yet:

“This is the beginning of a proper boom cycle — this isn’t a transitory spike.”

Ivan Glasenberg, the outgoing chief executive of mining and commodities giant Glencore says backs that opinion up, commenting this week:

 “Commodity prices will stay strong for a long way longer.”

A combination of both the USA and China investing in large national infrastructure programs simultaneously for the first time ever as a response to the pandemic’s economic impact, people spending more on goods rather than services, and the global investment in electrification and away from fossil fuels is driving unprecedented demand for raw materials.

The resulting high commodities prices are putting a rocket under the revenues of mining and commodities trading companies, who have seen margins expand dramatically over the past several months. London-listed Rio Tinto this week announced record interim net profits of $12.3 billion, up from $3.3 billion a year earlier, thanks to China buying up all the iron ore it can get its hands on at over $200 a tonne – over double the price it was fetching at the beginning of 2020.

As a result, the miner is handing out a record $9.1 billion half-year dividend to investors, $3 billion of which is a special dividend which will redistribute some of the excess cash generated by high prices.

It’s boom time for the sector and if, as predicted, the good times continue to roll for years, investors may be keen to increase their exposure to it. Here’s our rundown of ideas for investing in mining and commodities trading:

Rio Tinto

A diversified mining company, most of Rio’s revenues come from mining iron ore, with aluminium and copper important side lines, from mines in Western Australia’s Pilbara region. However, it also mines other metals and minerals from titanium and diamonds to boron (a mineral used in medical supplements and important to building strong bones and treating osteoarthritis) and salt.

This week Rio announced it has committed $2.4 billion to building Europe’s largest lithium mine at Jadar in Serbia, its first large-scale move into producing metals for electric vehicle batteries.

Rio’s focus on low-cost, high volume production mines, investing in automation and renewable energy, and paying down debt means that it is able to make money and maintain a steady policy of consistent dividends and share buybacks at every point over economic cycles. Which means investors could be in for a treat if margins remain unusually high for a sustained period.

rio tinto plc

The company keeps its house in good order and regularly expands its best mines while selling off non-core operations to maintain a strong balance sheet and able to invest in the best opportunities whenever they present themselves. Despite an extended period of strong gains for the Rio Tinto share price there could still be plenty more upside to take advantage of in the months ahead.

Speaking to Interactive Investors Mining analyst John Meyer thinks smaller mining companies are worth a look for the second half of 2021:

“I can see lots of value being added within the junior mining sector. I’m a little more cautious for the bigger mining companies, although they’re still making very large amounts of money off iron ore prices. If you think that these guys are digging up millions of tonnes of iron ore for an average cost of $30 a tonne and they’re selling it in China at somewhere close to $200 a tonne. So the margin is exceptional. But that is going to pull back because the Chinese government has said they are determined to pull back on commodity prices. “

Junior miners are notoriously risky investments but one option to spread the risk and take advantage of sector expertise could be to invest in a fund.

TB Amati Strategic Metals fund

TB Amati Strategic Metals fund, only launched in April and managed by Georges Lequime and Mark Smith of London Investment Consultants, is a focused play on metals looking to invest in a basket of 35 to 45 stocks, with a preference for the mid cap range and speciality metals.

It is picked out by CityWire’s David Stevenson as one of three funds for exposure to the commodities super cycle and its mid cap focus offers an alternative to large cap mining funds.

VanEck Vectors Global Mining ETF (GDIG)

As a passive alternative he also highlights the UK-based VanEck Vectors Global Mining ETF (GDIG). It currently has assets under management of $87m. The total expense ratio is a lowly 0.50% and over the last year to date, the share price is up 63%.

He compares it to the BlackRock World Mining Trust, which has only slightly better NAV returns this year but, as an actively managed fund, is much more expensive.

Meyer also thinks the shift to electric cars and renewable energy will mean the best ‘late cycle metals’ for investors to have exposure to will be those used in things like turbines and lithium-ion batteries. So rare earths, steel, copper, aluminium, nickel, lithium and cobalt.

Glencore

He pinpoints London-listed Glencore as the best way for investors to gain exposure to nickel. The Anglo-Swiss commodities trading and mining company has had a rocky time of it since going public via a huge IPO ten years ago but seems to have put the worst of its troubles behind itself and it could be a good moment for investors to get on board.

glencore plc

Despite setbacks this year at mines that have forced it to lower production forecasts, Glencore today announced it expects core profit to come in this year at the top of its $2.2 billion to $3.2 billion forward guidance range. That should leave plenty of room for improvement next year if prices stay strong and it gets output back on track.

Glencore is also a major cobalt producer and has restarted production at its Mutanda copper and cobalt mine in the Democratic Republic of Congo. The mine was mothballed in 2019 when cobalt prices crashed.

Glencore looks well placed to benefit from the focus of expected demand for metals over coming years and its trading division should also continue to benefit from market volatility.

Barrick Gold

Down 6% this year, gold and precious metals generally have been the victim of a return to risk-on sentiment in financial markets this year. But fundamentals still look solid and rising inflation would be expected to see gold come back into vogue as a safe haven asset.

Canada’s Barrick Gold, listed on the Toronto and NYSE stock exchanges, could be a good stock for exposure to gold. One of the largest gold and copper miners in the world, Barrick has good geographical risk diversity with operations in more than 12 countries. It’s also a relatively safe bet thanks to its focus on Tier One mines that produce at least 500,000 ounces of gold a year, have at least 10 years of productivity left and offer total cash costs per ounce in the lower half of the industry.

That means the company’s cash flow is strong even when gold prices fall and it currently has a strong balance sheet after selling off non-core mines and paying down debt. That should see dividends grow over coming years in most scenarios and the miner has a good chance of realising its ambition of becoming the world’s most valuable gold miner.



Important
This article is for information purposes only.
Please remember that financial investments may rise or fall and past performance does not guarantee future performance in respect of income or capital growth; you may not get back the amount you invested.
There is no obligation to purchase anything but, if you decide to do so, you are strongly advised to consult a professional adviser before making any investment decisions.

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